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Stockton, Calif., bankruptcy can proceed, judge decides

A view of the city waterfront seen from the Waterfront Hotel in Stockton, Calif. (Associated Press)
A view of the city waterfront seen from the Waterfront Hotel in Stockton, Calif. (Associated Press)

SACRAMENTO, Calif. – The people of Stockton will feel financial fallout for years after a federal judge ruled Monday to let the city become the most populous in the nation to enter bankruptcy.

But the case is also being watched closely because it could answer the significant question of who gets paid first by financially strapped cities: retirement funds or creditors.

“I don’t know whether spiked pensions can be reeled back in,” U.S. Bankruptcy Judge Christopher Klein said while making the ruling. “There are very complex and difficult questions of law that I can see out there on the horizon.”

The potential constitutional question in the Stockton case is whether federal bankruptcy law trumps a California law that says money owed to the state pension fund must be paid.

“It’s apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law,” Klein said.

A statement released by creditors said the group “respectfully disagrees with the court’s ruling.” The legal team for those creditors declined to say whether it would ask Klein for permission to appeal his decision, a requirement of bankruptcy code.

Stockton has tried to restructure some debt by slashing employment, renegotiating labor contracts and cutting health benefits for workers. Library and recreation funding have been halved, and the scaled-down Police Department only responds to emergencies in progress. The city crime rate is among the highest in the nation.

Because cities can’t liquidate assets, those that declare bankruptcy must come up with a plan for creditors to forgive some of the debt.

Holders of the biggest portion of Stockton’s debt insured $165 million in bonds the city issued in 2007 to keep up with payments to the California Public Employees Retirement System as property taxes plummeted during the recession.

Stockton now owes CalPERS about $900 million to cover pension promises, by far the city’s largest financial obligation.


 

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